Family Matters.
When It Really Matters.

Divorcing: What happens to the business?

On Behalf of | Feb 17, 2023 | Community Property Division, Divorce

California is a community property state, and so assets acquired and debts incurred during the marriage are jointly owned by the spouses. Technically, this means they could split everything 50/50 in a divorce. That, of course, is the starting point of the discussion, but in no way is it the whole story.

Some types of assets cannot be easily divided in half, and so the parties must come up with a different arrangement if it comes time to divide their property in a divorce.

This can be particularly tricky when one of the assets involved is ownership of a business.

Prenuptial, postnuptial and other business agreements

If prenuptial or postnuptial agreements are in place, then designating the business as separate or marital property could already be worked out. Further, if viable rules for dissolution of the business were set in writing when the business was begun or as it evolved, much of the groundwork will have been laid.

That said, there’s still a lot of negotiation to do.

Business valuation

Figuring out what the business is worth is most likely not a straightforward, number-crunching task. That assessment will vary with the nature of the business and also the lens used for valuation.

There are three methods for valuing businesses:

  • Cost approach: Basing the value on the fair market value of the net assets of the business
  • Market approach: Relying on what similar businesses have been getting in the market in the recent past when they’ve been sold
  • Income approach: Looking to the future, projecting a trajectory of earnings and basing the current value of the business on that potential

Control of the business

When courts decide these matters, they look closely at the evolving role each spouse had in the business. Next, the contribution to the business and relative ownership thereof has to be sorted out.

For every move made, there will be different tax implications to consider. And then there’s the predictable impact on child custody if the couple has children to care for.

Assessing business value and plotting its future, the post-divorce course is a complex, deliberative project. The careful guidance of counsel experienced in this area of the law is best sought as early in the process as possible.